July 2008
Pork is cheap in the U.S. But it is “dirt cheap” for many of our foreign buyers when the strength of their currencies effectively lowers the price even more. Pork is at bargain basement prices when you realize that U.S. producers are producing and selling hogs at huge personal losses to themselves. In essence, U.S. producers are providing huge subsidies to U.S. and foreign consumers. Why wouldn’t the world’s pork buyers be banging at our door for these bargains? Why would foreign pork producers want to try to compete with U.S. producers? All this says U.S. pork prices will explode to the upside much as most other commodities. The question is when?
First, let’s start with cheap domestic pork. Retail prices of pork have averaged $2.85 per pound so far this year compared with $2.87 for 2007. Yes, that is lower pork prices this year compared to last year. My estimates are that pork producers have contributed to the lower pork prices with about $1.4 billion of losses in the first-half of 2008 alone.
The cheap U.S. dollar relative to other countries with which we trade pork should stimulate exports and reduce pork imports. That is exactly what we are seeing. For the first four months of 2008, pork exports have expanded by 52 percent and imports have dropped by 12 percent.
Trade is accounting for a substantial portion of the record pork production in the U.S. In the first four months of 2008 commercial production was up 11 percent, yet when trade was considered, the amount of pork available to U.S. consumers was only up six percent. That is to say that additional trade has accounted for about 5 percent of all the added pork production in early 2008. More importantly, the export parade is just getting rolling as pork exports reached a record 22 percent of U.S. production in April. This was up from a mere 14 percent for all of last year.
Where is all that pork going? The answer is almost everywhere as the world has discovered one of the last food bargains on the globe. About one-half of the higher exports this year compared to the same period last year are headed to China and Hong Kong (most likely transshipped to China). But most other major buyers are up as well with Japan up 14 percent, Russia up 58 percent and Canada up 27 percent.
It is becoming clear that the world will continue to buy up the huge U.S. production until pork prices move sharply higher. Maybe the U.S. consumers can’t eat all of the U.S. produced pork at profitable prices to producers, but the world sure can.
So how much pork is there going to be? First, consider the June flooding and the subsequent movement of corn prices from the $6.00 level upward to $7.00. The bleakness of the outlook surely has convinced more sow slaughter. The latest Hogs and Pigs report from USDA shows the breeding herd down about one percent with farrowing intentions to drop by two percent this summer and then be off four percent this fall. Both of those will likely be greater drops as the USDA survey was taken before the June flooding. Another two percent drop would put the summer farrowings down four and fall down six percent-some serious declines.
Slaughter supplies then will be up by about 10 percent in July, and then the percentages will begin to drop with six percent higher supplies in August, then four percent more in the fall. Winter slaughter supplies could finally be down by three percent and spring 2009 supplies could be down as much as five percent.
So when does the boom in pork and hog prices come? Just looking at U.S. slaughter supplies says prices will improve very late this fall and winter, and go wildly higher by next spring and summer. When one adds the trade boom, this advances the price escalation. Trade data lags about two months so we are always slow to see those impacts. My guess is that trade will continue to accelerate and this will encourage even stronger prices than the supply reductions expected for late this year and 2009.
The movement upward has begun for cattle where prices have been up nearly $10 per hundredweight in the last three weeks. Given the coming declines in pork supply and the more than vigorous export growth, hog prices should not be far behind. If U.S. consumers don’t want to buy up the last of the cheap pork, the world is anxious for the opportunity.
The issue for individual pork producers is can they hang on long enough for hog prices to catch up with costs. My best estimates now are for live hog price to trade in the lower-to-mid $50s for this summer and fall then move into the low $60s by winter and on to the higher $60 to mid $70 by next spring and summer. Given prices of corn and soybean meal on July 7, my estimate of costs of production for farrow-to-finish producers is in the low $60s.
The extraordinary losses of 2008 may be offset by extraordinary profits in the last-half of 2009 and 2010. This will especially be true if CRP land is released in 2009, if ethanol receives less support, and if 2009 weather is favorable. Oh, and then one has to also say that crude oil prices don’t keep moving higher in 2009. There are still plenty of uncertainties and most won’t feel relieved about “better times” until they arrive.
July 7, 2008
Chris Hurt
Purdue University
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